Retailers embrace VAT cut

2 12 2008

The cut in the VAT announced last week by the Chancellor initially didn’t receive the reception that he might have been perhaps hoping for. News reports, newspapers and websites were filled with comments against the idea of the VAT cut, some being funny, and some downright ironic. Most were along the lines of “10p saving! Whoopee!”

However, over the weekend, it looks like many retailers are whole-heartedly embracing the VAT cut. Not because they like to go through the trouble of having to change the prices and labels and the IT systems. But because it gives them another reason to slash their prices, much more than the 2.5% VAT cut. But, why do they need a something like a VAT cut to give them a reason to slash prices? Surely, they can do it without that.

Yes they can. And many, like M&S and Debenhams, did a fortnight ago when they had a one-day only “spectacular” sale. Having yet another “spectacular” sale nearly three weeks before Christmas would give the impression that they have a lot of left over stock which they are desperate to sell. Although many shoppers would flock the stores to bag the bargains, which many have been doing due to the ongoing sales, many would stand back and wait for the prices to drop even further – a clear sign of deflation.

Hence, the cut in VAT, although not significant on its own, has provided the retailers with a timely reason to slash their prices further, using the VAT cut as a “mask” for doing so. Some companies, however, like BT and Virgin Media have decided to pass only the 2.5% cut to their customers.

But, how do single price retailers like Poundland, 99p Stores, or numerous other independent single price retailers pass on the VAT cut to their customers? After the VAT cut, an item costing £1 would then cost:
117.5% = 100p (The VAT is already added to the final selling price)
1% = 0.85p
115% = 97.87p (new price)
Poundland wouldn’t be able to rename itself as 97pLand for a period of 13 months, and the slogan “Everything’s £1” would then be deemed misleading. The only other option is for such businesses to increase their profit margins, which is not a bad thing, but they cannot take the advantage of being able to advertise the fact that they are passing on the VAT cut to their customers. Or, they could sell products that they wouldn’t have been able to in the past, as it would’ve been priced above £1, but can now since the cut in VAT allows the price to be £1.

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Woolworths goes into administration

28 11 2008
woolworthsThe high street retailer Woolworths, fondly known as Woolies, has been forced to go into administration after it failed to find a buyer to snap it up for a nominal £1. So, why didn’t anybody buy it, surely £1 for a whole company seems like a bargain? That’s because the buyer would have not only acquired Woolworth’s assets (things it owns), but also its huge liabilities (money it owes), £385 million to be exact.

So, what is administration and when does a business go into administration? With regards to business, it is when a business doesn’t have enough funds to trade, also known a cash flow crisis. Cash flow is not the same as profitability of a business, but refers to the cash flowing into and out of the business. If cash coming in is less than the cash going out, then the cash flow is negative and it means that the business does not have enough funds to meet the current liabilities, like creditors and suppliers.

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However, going into administration isn’t still the end of the story for Woolworths. In fact, administrators, in this case the accountancy firm Deloitte, protect the company from creditors seizing stock to pay off the money that is owed to them. The administrators are trying to find a buyer for Woolworths, failing which it will be forced to go into liquidation. This is where the administrators try to sell off the assets to recover any money they can to pay off the debts. Woolworths competitors are dreading this because although it will mean less competition in the long term, since there is one less player in the market, in the short term, it will mean a price war during Christmas as the administrators will slash prices to sell off all the stock.

So, is the reason for Woolworth’s difficulties due to the credit crunch? Well, the increase in household bills has meant that consumers are spending less. This is evident from the fact that Woolworth’s like-for-like sales have decreased whereas their costs have increased leading to increased losses. Many analysts say that Woolworth’s difficulties should come as no surprise, as Woolworths didn’t have a clear brand image, what its brand stood for, and its purpose in the market. Additionally, suppliers of Woolworths found it expensive to insure themselves against the risk that it wouldn’t be able to pay them and hence, Woolworths had to pay upfront for the supplies, unable to take advantage of buying on credit that some of its competitors enjoy.

Woolworths has around 815 stores and employs around 30,000 employees. If the business does go into liquidation, all these employees stand to lose their jobs. Also, the businesses that supply to Woolworths will also suffer losses. The question many people are asking is why isn’t the Government bailing Woolworths out, after all, it did bail out the banks. Well, the Government can’t bailout every business in difficulty; it’s a natural business process where the one with the weakest business model fails hence making the others stronger due to decreased competition.

Other than its retail business, Woolworths Plc. also owns Entertainment UK and 2Entertain. Entertainment UK specialises in the supply of CDs and DVDs to retailers such as Tesco, Zavvi, W H Smith, Asda, Sainsbury’s, Morrisons and of course Woolworths itself. EUK is said to be a profitable business and the administrators are looking for a buyer for it as well. If EUK is shut down, it will no doubt affect the retailers it supplies, especially during the crucial trading period of Christmas. BBC Worldwide and Woolworths Plc., on the other hand jointly own 2Entertain, and there are talks of BBC Worldwide buying Woolworth’s share of the business.
It has also been reported that MFI is also going into administration, and it looks like a few more will follow, certainly after Christmas. If you want to see Woolworth’s Interim report for 2008, click here.





Children help their parents spend their money

14 11 2008
David Beckham in a Motorola advertisement

David Beckham in a Motorola advertisement

According to recent news, parents are unwittingly spending £191 million a year to fund their children’s shopping habits. Or rather, the children are doing it for them on their behalf to save their parents the trouble of doing so. According to a survey consisting of 500 parents and 500 children, around 20%, or 1 in every 5, children have admitted to using their parents’ credit card for their online purchases.

The items in the shopping basket include the latest electronics, games, etc. Put simply, items that are on every child’s wish list. The age of the children ranges from 8 to 16 years and the value of the average purchase is said to be around £25. Of the parents surveyed, only 2% felt that their children would purchase goods online without their permission. 20% of the children also knew their parents’ username and password for their shopping websites. This made it easy for them to access their accounts and place orders.

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The recent strain being put on personal finances due to the rise in prices and unemployment would have undoubtedly led to parents cutting back their spending on buying the latest gadgets and gizmos and branded fashion accessories for their children. This means that the children feel “left out” when all their peers have the latest mobile phone or mp3 player and they are stuck with the “old” one.

Certain companies prey on this insecurity that the children harbour by pressurising them to purchase, or rather pester their parents to purchase the products that are endorsed by their “heroes” whom they “look up to”. The advertising method is such that it sends out the message to youngsters that a brand name is much more important than they product itself. It is endorsed by a well-known celebrity and therefore it’s cool and fashionable to own it and most certainly well worth the expensive price tag.

Often, the prices of these products are 2-3 times the price of their unbranded, store own-brand or less known branded counterparts. The obvious reason for this is that it allows the companies to “skim” the market, or in other words, pricing their products higher than the competitors since they know that the consumers will still want to buy them.

In August this year, The Association of Teachers and Lecturers expressed concern when their research showed that children who didn’t have the latest gadgets or wear garments that didn’t sport a fashionable logo were often bullied and mocked by their peers.

The report also highlighted how “brand aware” the children are and how in the race to be up-to-date, they end up having low self esteem and self confidence because their “net worth” or “net value” amongst their peers is judged by the brands they own.

In essence, what these companies are doing is “adding value” to a product by merely associating it with their brand. So, what you end up paying for is the brand. Of course, many might argue that many branded products do offer good value for money because they are of a better build quality. And what you get in return for the premium charged is peace of mind that the product will last. No doubt, this is true. But then, this isn’t true in all cases.

Interestingly, 30% of the parents’ admitted to saving their banking details online.
If the children can easily access them, just imagine how easy it might be for a fraudster to access the details. Then the orders might not be for £25, but more like £2500.

http://ukpress.google.com/article/ALeqM5i_9ZhcHk7F5v3WAReNAjjeFmrMxg
http://news.bbc.co.uk/1/hi/education/7549770.stm
http://www.business-easy.blogspot.com





Profits at Starbucks go Skinny Latte

12 11 2008


Starbucks Coffee House

Starbucks Coffee House

Starbucks Share PriceProfits for the coffee chain Starbucks fell by 97% in the fourth quarter to $5.4 million, as compared to $158.5 million this time last year. Although the sales revenue were up 3% to $2.52 billion, like for like sales actually decreased by 8%.

This shouldn’t really come as a surprise then since consumers are cutting back on what they deem “luxuries” and are more cautious about their spending and are literally watching their pennies. Starbucks is perhaps well known for its high prices as much as it is for its coffee. Its share price dropped by 3% after the news broke out and was trading at $9.91. Last year, it would have been worth around $20-$30.Starbucks said that it has seen a decrease in customer traffic, in other words the number of customers visiting its branches, and also, crucially, the value of each transaction per customer. So, it is likely that the increase in sales revenue is likely to be due to the increase in prices.

Although drinking coffee is one of life’s little pleasures, its prices in the cafés are anything but little. A cup of coffee for $4 or £2.50 may seem insignificant on its own, but multiply them up for every working day of the month and you are left with a sizeable figure. Starbucks could lower its prices, but it is seen as a premium brand and would as a result devalue its brand value. Think of Marks & Spencer’s food range competing on its prices with Tesco’s Value range or Sainsbury’s Basic range and you get the picture about devaluing the brand value.

It’s likely that other coffee chains like Café Nero and Costa Coffee would now be worried about their own situation while the likes of McDonald’s will be rubbing their hands with glee at the prospect of attracting coffee drinkers with their cheap prices. McCoffee anyone?

http://www.business-easy.blogspot.com





This isn’t just any gas & electricity; this is M&S gas & electricity

15 10 2008

Marks & Spencer announced today (15 Oct) its partnership with Scottish and Southern Energy to launch its new offering- M&S Energy. Customers can sign up in store and online through www.mandsenergy.com which goes live on the 27th of October. M&S plans to reward their customers by offering them M&S vouchers when they sign up, reduce their energy usage or opt for paperless billing. It is relying on its strong brand name to attract customers. However, since M&S is regarded more as an upmarket brand, it is unlikely that people will switch to M&S initially since it will naturally be perceived to be more expensive than its competitors.

Offering vouchers rather than a discount on the bill itself is an interesting way of making people sign up and shop at M&S since shopping at M&S is the only way to redeem the vouchers. This would lead to a rise in sales for M&S, who has seen its sales drop-M&S style, and would ensure that the money stays within the organisation. This is because if you get a £10 voucher, M&S is not actually spending the £10, but the voucher is worth £10 that can only be spent at M&S. This is different to it giving you £10 discount on your bill that it does have to spend and since you are free to spend it anywhere you choose, M&S might not benefit from it. It will be interesting to see if other stores, like Britain’s Biggest Discounter, Tesco, will join M&S to offer gas & electricity to its customers.

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Further reading:

M&S Corporate Website: http://corporate.marksandspencer.com/media/press_releases/company/pressrelease_mandsenergy

M&S Sales:https://bizeasy.wordpress.com/2008/10/03/ms-weather-forecast-bleak-in-britain-sunny-in-shanghai/





M&S weather forecast-bleak in Britain, sunny in Shanghai

3 10 2008
M&S, Shanghai. Image Copyright M&S

M&S, Shanghai. Image Copyright M&S

Britain’s biggest clothing retailer, Marks & Spencer, announced yesterday (03 Oct) that like-for-like sales for stores including the new ones had fallen by 6%. Although this is’nt as much as John Lewis, who saw its sales drop by 8%, it is still bad. General merchandise, which includes homeware and clothing, saw a fall of 6.4% while food sales fell by 5.9%. This fall in sales is being attributed to consumers switching to cheaper brands offering better value for money. Afterall, when it begins to pinch in the pocket, brand loyalty is bound to be thrown out of the window. On a more optimistic note, M&S said that its promotion “Dine in for £10” was “spectacularly successful” and its online sales had increased by 34%.

On the bright side, the opening of M&S’s store in Shanghai yesterday was’nt any less of a spectacular success either. The store, situated on the Nanjing West Road, saw home-sick expatriates and the affluent Chinese middle-class queue up outside the store waiting to get their hands on traditional British merchandise. Apparently, items such as biscuits, jams, Double Devon Toffees, fisherman’s pie and digestive biscuits were amongst the most popular items. M&S is targeting the fast expanding Chinese middle-class with increasing disposable income. It hopes that its stores situated internationally will in the future account for 15%-20% of its revenues. Ironically, according to the Guardian, about 30% of non-food items that M&S sells are infact manufactured in China, but will have to be re-imported for licensing reasons.

http://business-easy.blogspot.com/2008/10/m-weather-forecast-bleak-in-britain.html





Primark launches website to promote its ethical practices

27 06 2008


In a bid to improve its reputation and brand image, Primark has launched a website to promote its ethical practices. The Panorama programme, aired on the BBC, alleged that the garments sold by Primark were made in sweatshops employing child labour in India. Primarklater announced that it had terminated contracts with suppliers shown in the programme and is since trying to build up confidence amongst its customers. In a time where consumers are cutting their spending, the last thing that Primark needs is bad reputation.

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http://www.marketingweek.co.uk/cgi-bin/item.cgi?id=61259&d=254&h=5&f=3

Ethical Primark: http://ethicalprimark.co.uk/

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